Norcros (NXR) – FY Results Preview

Norcros are due to issue their full year results tomorrow. As this is a top 5 holding I expect to be covering them in tomorrow’s 7:59 cut.

Background

Norcros describes itself as a “market leading supplier of high quality and innovative bathroom and kitchen products”. UK / Irish brands include Triton showers, Merlyn shower enclosures / trays, Vado taps / showers, Croydex toilet seats / bathroom furnishings, Abode sinks and taps, Johnson Tiles and Norcros title adhesives. In South Africa they own some physical showrooms as well as supplying tiles and tile adhesives. The revenue and profit split is 2/3rds UK, 1/3rd South Africa.

Business has generally been going well the last few years with underlying profits growing and a series of acquisitions. Risks are exposure to consumer spending, the construction cycle, South Africa and volatile currencies, plus significant levels of debt and a large pension scheme that is in deficit.

It is perhaps understandable then that they are valued at a PE ratio of under 6 despite good medium / long term EPS growth.

Debt

The company follows a pattern of progressively reducing debt to a comfortable level and then making an acquisition, that although on a relatively cheap valuation, struggles to add value to shareholders because it must be funded by shares issued at a lowly rating and/or debt that reduces Norcros’s rating further. The most recent acquisition was funded by a mixture of debt and a placing / open offer at 172p.

Debt has moved as follows recently (compare with market capitalisation of around £160m):

£mNote
Sept 201720.8
March 201847.1 Increased due to acquisition
Sept 201853.5 Seasonal increase
March 201936(Guided)

Accordingly they could probably pay off debt (at least at year-end) within three years if they wanted to. However this is unlikely to happen as they have set themselves a strategic target to double revenue within 5 years.

Pension Scheme

The strategy of growing the business by acquisition has been justified in the past partly to balance the size of the business versus the pension scheme.

This time last year the pension scheme had liabilities of £448m and an accounting deficit of £48m (compared to Norcros’s market capitalisation of around £160m). This was down from the previous year and my modelling show it should be down again this year, maybe to around £35m, although this is very sensitive to the assumptions they choose to use.

The triennial actuarial valuation and outcome of the pension trustee negotiation is due around now, and could possibly be mentioned in tomorrow’s preliminaries. Unfortunately this valuation is at an effective date of April 2018 when the deficit was slightly higher than three years before and furthermore the accounting and actuarial assumptions used last time were unusually similar. It is likely that the triennial valuation will produce a higher deficit, potentially significantly so – my modelling shows £75m – £100m vs £73.5m last time. At the upper end of this range the trustees are likely to demand increased recovery payments and perhaps restrictions on dividends. It is also possible that the pension protection fund will require higher premiums than last year, given their higher debt levels.

Trading Statement

They last updated the market with a FY trading update on 10th April which I briefly covered on my blog. Like-for-like UK had recovered from the first half and South Africa continued to grow well, albeit suffering a currency hit. Due to a recent acquisition they reported revenue to be 10% ahead overall, guided profit inline and debt reduced.

Conclusion

This is a financially geared business which could be disproportionately affected by a turndown in trading. Tomorrow I will primarily be focusing at their outlook statement, but also ready to react to any news on their pension or further acquisitions.

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